Question

#207

Sam Company had an interest-bearing note receivable in the face amount of $7,800. This note was created on March 1, Year 1, as the result of a $7,800 sales transaction by Sam. The note's interest rate and due date were 7% and February 1, Year 2, respectively. The principal and all of the interest are to be collected in full on the note's due date.

On September 1, Year 1, Sam found itself in need of cash and opted to discount this note at its bank on that date. Sam's banker agreed to discount the note on September 1, Year 1, using a discount rate of 8%. (Please show all work)

Q: How much Cash did Sam receive from its banker on September 1, Year 1, as a result of the discounting of this Note Receivable on that date?

Answer 1

Computation of total cash received by Sam on account of discounting of note on September 1, Year 1 is as follows :

Face Value of the Note = $ 7,800

Interest rate of the Note = 7 %

Period of Note = 11 months

First , calculate the Maturity value of the note receivable

face value of the Note Receivable = $ 7,800

Add :Interest on note receivable (7800* 0.07 *11/12 ) = $ 500.50

Maturity value $ 8300.50

then, compute the  Discount on Note

Discount = discount rate * Maturity value of note * Discount Period

where Discount period is the length of time between a note's sale and its due date i,e. the unexpired period of the note .In this case , the discount period is 4 months

and Discount rate is the rate at which the bank buys the note.

Discount = 0.08 * 8300.50* 4/12 = $ 221.35   

Now , Discounted value of Note = Maturity value of note Less Discount

Discounted value of Note = $ 8300.50 - $ 221.35 = $ 8079.15

Thus , the net cash received by Sam from its bank on September 1 = $ 8079.15